Fitch Upgrades Rassini's IDRs to 'BB-'; Outlook Stable

Fitch Ratings has upgraded Rassini Automotriz, S.A. de C.V.'s (RA) Foreign and Local Currency Long-Term Issuer Default Ratings (IDRs) to 'BB-' from 'B+'. The Rating Outlook is Stable.

The ratings upgrade reflects RA's strengthened business and credit profile resulting from increased market penetration in suspension systems and brakes that should allow the company to sustain above average volume growth. Also factored into its upgrade are recent debt repayments and expected solid funds from operations (FFO) generation in the coming years due to the gravitation of auto manufacturing to Mexico and a favorable demand outlook for the company's products. All these factors combined should allow RA to remain within its long-term total leverage target below 2x and continue to improve its liquidity profile.

The ratings reflect RA's business position as a Tier-1 supplier of suspension and brake components, its geographic diversification, efficient operations, low cost structure and improved financial profile. The company's ratings are limited by the cyclicality of the automotive industry as well as RA's regional and customer concentration in North America, small scale and credit track record.

Strong Business Position

RA, a subsidiary of Rassini, S.A.B. de C.V. (Rassini), manufactures suspension and brake components for light and heavy vehicles, with leading positions in North America and Brazil. The company's main product line, leaf springs, which accounted for 58% of total sales in 2015, has historically had a dominant market position in North America. This strong position results from the group's specialization and technology development, close and longstanding relationships with customers through product design and development, its geographic location, and integrated operations.

Product Diversification Increasing

During 2014-2015, Rassini was awarded new contracts totalling about USD1.450 billion for the next five years. Approximately 35% of these agreements was related to Rassini's brakes division, where revenue growth has been the fastest. This division accounted for 31% of revenues during 2015, compared with 17% during 2012. The company has also gained incremental business in coil springs. Strong market penetration should allow Rassini to continue to increase its market share of the North America brake and coil spring markets and achieve above average industry growth.

Customer and Regional Concentration

Rassini is considered an essential supplier to several original equipment manufacturers (OEMs), including General Motors Co., Fiat Chrysler Automobiles N.V. and Ford Motor Co. Detroit's Big Three OEMs represented 77% of Rassini's total revenues during 2015; North America accounted for 89% and 99% of Rassini's total revenues and EBITDA, respectively. Both regional and customer concentration as a percent of revenues increased as a result of organic growth in North America as well as plummeting vehicle demand in Brazil. Fitch expects the contribution of North America to fully offset shrinking profitability in Rassini's Brazilian operations.

Leverage Reduction

Rassini has continued to reduce its leverage level as a result of higher EBITDA generation in North America as well as debt repayments. On a consolidated basis, Rassini's total adjusted debt/EBITDAR for the last 12 months (LTM) ended June 30, 2016 was 1.3x which compares positively to year-end 2014 levels of 2x. The company is evaluating multiple options to continue to grow, including organic investments or potential acquisitions. Rassini's ratings consider that the company's long-term capital structure will remain within management's target of staying below 2x total debt/EBITDA.

Sound FFO Generation Expected

FFO has increased to USD97 million during 2015 compared with USD61 million and USD55 million during 2014 and 2013, respectively. Strong market penetration of the North America brake market has increased Rassini's cash flow. A shift in consumer preference for pickup trucks, and a strong dollar relative to the Mexican peso have boosted performance during the last two years. Fitch is projecting that FFO will peak at about USD110 million in 2016 due to extraordinary revenues, but that Rassini's ability to generate FFO will stay relatively strong over the intermediate term at about USD100 million per year. Fitch expects free cash flow (FCF) to remain around USD25 million per year during the next few years.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case include:

--Consolidated volumes peak in 2016 but remain above 2015 levels.

--Rassini's EBITDA margins rise significantly in 2016 as production volumes grow, the company's cost discipline is further enhanced by a strong U.S. dollar, and somewhat lower electricity costs in Mexico.

--Total adjusted debt/EBITDAR stays at or below 2x over the intermediate term.

--Rassini remains FCF positive over the intermediate term.

RATING SENSITIVITIES

Negative rating actions could result from a combination of lower volumes and profitability as a result of material deterioration in North American light vehicle demand which translates into sustained leverage above management's target of 2x. Weak operating cash flow and deteriorating liquidity could also result in negative rating actions.

Positive rating actions are unlikely given the recent upgrade. However, a significantly larger scale coupled with increased customer or geographic diversification, and expectations of sustained leverage levels at or below 1x in conjunction with a strong liquidity profile could result in positive rating actions.

LIQUIDITY

Rassini's sustainable liquidity is considered adequate and is primarily supported by its solid cash flow generation and low debt which together with a strengthening business profile should allow the company to continue to manage upcoming debt maturities. Rassini's financial debt was USD150 million as of the second-quarter 2016. The majority of this debt matures over the next three years and compares to estimated readily available cash of USD45 million. The company is looking at refinancing alternatives and an expectation of a lengthening maturity profile is incorporated in the ratings. The company also uses receivable factoring facilities on average in an amount of USD30 million-USD40 million. Fitch treats these facilities as debt for its ratio calculations as immediate replacement funding is required if the receivables financing shuts down or eligible receivables decline in quality and the facility ceases to fund ongoing receivables.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

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